Question

Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly.

At the end of 2020, accounts receivable were $610,000 and the allowance account had a credit balance of $74,000. Accounts receivable activity for 2021 was as follows:

Beginning balance	$	610,000
Credit sales		2,800,000
Collections		(2,663,000	)
Write-offs		(57,000	)
Ending balance	$	690,000

The company’s controller prepared the following aging summary of year-end accounts receivable:

		Summary
Age Group	Amount		Percent Uncollectible
0−60 days	$	460,000	4	%
61−90 days		78,000	15
91−120 days		67,000	26
Over 120 days		85,000	41
Total	$	690,000

Required:
1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year.
2. Prepare the necessary year-end adjusting entry for bad debt expense.
3-a. What is total bad debt expense for 2021?
3-b. How would accounts receivable appear in the 2021 balance sheet?
  

Answer 1

Q1.Journal entries to record the monthly bad debt accrual and the write-offs during the year:

Particulars	Debit amount($)	Credit amount($)
1.Bad Debts expense a/c (2,800,000*2%) To Allowance for uncollectible accounts (Entry for monthly bad debts accrual)	56,000	56,000
2. Allowance for uncollectible accounts To Account receivable a/c (Write offs recorded)	57,000	57,000

Q2. Next, we need to record the necessary year-end adjusting entry for bad debt expense:

For that we need to calculate the bad debts expense amount:-

Age Group	Amount($)(a)	Percent Uncollectible(b)	Estimated bad debts(a*b)($)
0−60 days	460,000	4	18,400
61−90 days	78,000	15	11,700
91−120 days	67,000	26	17,420
Over 120 days	85,000	41	34,850
Total	$690,000		$82,370

Now, adjustment entry for bad debt expense-

Particulars	Debit amount($)	Credit amount($)
1. Bad debts expense a/c (wn.1) To Allowance for uncollectible accounts ( Bad debts expense recorded)	$9,370	$9,370

Working notes:-

1. Bad debts expense amount= Total Estimated bad debts- [ Credit balance of allowance account+ Bad debts accrual] + Write offs

=$82,370-[ $74,000+ $56,000]+ $57,000= $9,370

Q3. (a) We have to ascertain total bad debt expense i.e is equal to = $56,000+ $9,370= $65,370

(b) For this, we have to prepare the Balance sheet for 2021:

Swathmore Clothing Corporation Balance Sheet (2021)
Current Assets:
Account receivable	$690,000
less:Allowance for uncollectible accounts	($82,370)
Net Account receivable-	$607,630